Chiang Kai Shek College

Department of Accountancy

A case study on

China Media Express Holdings, Inc. Charged with Fraud

Submitted by:

Ng Cheong, Jasmine Marie M.

Submitted to:

Prof. Cristy Allauigan, CPA, MBA

Case

In October 2009, China MediaExpress became a publicly traded company through a

reverse merger. The SEC alleged that the company grossly overstated its business operations,
profits and overall financial condition as soon as it became a publicly traded company.

In addition, even though the company’s public filings and press releases falsely stated
that two multinational corporations were its clients, its chairman and CEO Zheng Cheng signed
them and attested to their accuracy. After its external auditor raised suspicions of fraud, Zheng
Cheng tired to pay off a senior accountant.

Upon becoming a publicly traded company in October 2009, China MediaExpress began
grossly overstating its cash balances in public filings and press releases. For example, its 2009
annual report showed a cash balance of $57 million when it only had an actual cash balance of
$141,000. On November 9, 2010, it issued a press release showing off a cash balance of $170
million when the actual cash balance was only $10 million.

After China MediaExpress grossly misrepresented its true financial state, its stock price
rose up to more than $20 per share. Zheng Cheng was given financial incentives to misrepresent
the company’s true financial condition. When the company met the net income target for the
fiscal year 2009, he received 600,000 shares of the company’s stocks that had a value of $6
million at that time.

In March 2011, due to suspicions of fraud in the company, China MediaExpress’ external
auditor resigned. The company’s audit committee hired a law firm to conduct an internal
investigation. The law firm hired a Hong Kong forensic accounting firm to help in getting the
bank statements from the company to prove the validity or accuracy of the publicly reported cash
balances. The night before a planned visit by the accounting firm’s team to the banks, Zheng
Cheng called a senior accountant, told him to meet him and get from him the authorization letters
necessary to obtain China MediaExpress’ bank statements and offered him $1.5 million to assist
with the investigation. The senior accountant refused his offer. After approximately one month,
the bank statements were obtained and they showed huge discrepancies between publicly
reported and actual cash balances.

Company Background

China MediaExpress Holdings, Inc., a China-based company, is a supplier of television

advertising network on inter-city and airport express buses in Beijing, Shanghai, Guangzhou,
Tianjin, Chongqing, Guangdong, Jiangsu, Fujian, Sichuan, Hebei, Anhui, Hubei, Shandong, and
Shanxi. The company is headquartered in FuZhou, China (Company Overview of China
MediaExpress Holdings, Inc., n.d.).

Review of Related Literature

Fraud

According to Webster’s New World Dictionary, fraud is the “intentional deception to

cause a person to give up property or some lawful right.” According to the Association of
Certified Fraud Examiners, fraud is defined as “any intentional or deliberate act to deprive
another of property or money by guile, deception, or other unfair means.” Fraud is an intentional
misrepresentation or concealment of information intended to deceive (Rajan, 2013).

For an act to be considered fraudulent, it must meet the following five conditions:

1. False representation. A false or misleading statement or nondisclosure must be present.

2. Material fact. A fact must be a material factor in persuading or encouraging someone to
act.
3. The intention to deceive or mislead and the knowledge that one’s statement is false or
misleading must be present.
 4. Justifiable reliance. The false statement must have been a material factor on which the
injured party relied on.
5. Injury or loss. The deception must have brought about injury or loss to the fraud victim

Through the aid of fraud indicators, fraud can be distinguished from errors or mistakes
(Rajan, 2013). Fraud indicators can be classified into three categories: personal shortcomings,
financial shortcomings and operational shortcomings (Rajan, 2013).

a) Personal Shortcomings:
1. A person lives too far his means
2. High employee turnover
3. Untypical behavior of employees or co-workers

b) Financial Shortcomings:
1. Unexplained entries in financial records
2. Extremely unusual or huge amount of cash transactions
3. Altered, inadequate, missing, or stolen financial records or documents
4. Transactions do not have the correct transaction numbers or serial numbers

c) Operational Shortcomings:
1. Lack of internal accounting or process controls
2. No segregation of duties
3. Unreconciled inventories and financial records
4. Unauthorized transactions

The Fraud Triangle

The fraud triangle is a framework designed to explain the factors that cause someone to
commit occupational fraud. It consists of three components, which together lead to someone
violating trust and committing fraud. Think of the fire triangle. In order to produce fire, there
must be heat, oxygen and fuel altogether. When the three elements of fire are present, a fire can
be produced. Likewise with the fraud triangle. When pressure, opportunity and rationalization
are present, fraud is likely to occur (Glasbeek, n.d.).

Pressure is a financial or emotional force that leads to someone committing fraud. Most
people need some form of pressure to commit fraud. It does not matter whether the pressure
makes sense to others or not. Pressures can include money problems, gambling debts, drugs,
alcohol addiction or mounting medical bills (Brumell Group, 2015). Greed can also become a
pressure, but it is usually flavored with a sense of injustice (Glasbeek, n.d.).

During the course of the auditors’ work, they should be on watch for work-related
pressures such as unfeasible targets and expectations. Moreover, the auditors should also
evaluate the company’s fraud awareness training program (Glasbeek, n.d.). Companies can help
lessen pressures to commit fraud by establishing programs to provide help to their employees in
their time of need (The Fraud Triangle: Three Conditions That Increase the Risk of Fraud, n.d.).

Opportunity is the ability to carry out fraud without being caught (Brumell Group, 2015).
In order to commit fraud, fraudsters first find an opportunity and use that opportunity to execute
the fraudulent act. The opportunity to commit fraud can arise if the members in a company have
access to its assets and information that provide a way for them to both commit and conceal
fraud. When a company has poor or defective internal controls, weak processes and procedures,
unauthorized or unchecked access to its assets and information, and ineffective management
oversight, fraud is likely to occur (Glasbeek, n.d.).

The most important action that companies can take to prevent and detect or correct fraud
is to have an effective internal control. Internal auditors can help companies by evaluating the
design of their internal controls and their compliance to it, assessing weak processes and
procedures, and reviewing management’s oversight (Glasbeek, n.d.).

Rationalization is the justification of fraudulent actions (Brumell Group, n.d.). Employees

may justify their fraudulent behavior by believing that they have honest and sincere reasons to
commit fraud. Rationalizations can include making up for being underpaid, the company
deserves to be stolen money from because of maltreatment to employees, replacing a bonus they
believed they are worthy of but did not receive, a fraudster justifying himself that he is just
borrowing money from the company and will pay it back later, and an embezzler convincing
himself that the company does not need the money or assets (Glasbeek, n.d.).

Auditors can evaluate the company’s corporate culture by assessing the management’s
philosophy and operating style and the company’s code of ethics and fraud program or policy,
and performing random or surprise audits.

Fraud is Hard to Detect

Auditors only examine a very small sample of the total population of transactions. They
rarely detect frauds because it is not their main goal or objective. The probability of detecting
frauds can increase if auditors are inclined to do so. During financial statement audits, there are
opportunities to detect frauds. If auditors are eager or persistent enough, they will be able to
detect them (Reuters, n.d.).

The matter of detecting frauds is extremely important not only for auditors but also for
investors and other users of financial statements. They need to understand the fraud risks present
in the financial statements to realize how unreliable and inaccurate financial statements are due
to the issue of fraud (Reuters, n.d.).

The reasons why fraud is difficult to detect are: reliance on internal controls,
predictability of audit tests, insufficiency of sampling, scope and materiality, inexperienced
auditors, dynamic business environment, insufficient follow-up, needle in a haystack, and use of
estimates (Reuters, n.d.).

1. Reliance on Internal Controls

The depth of audit tests to be performed and the types of audit procedures to be
performed are greatly influenced by the assessment of internal controls by the auditors. In order
to ensure to accuracy of the financial statements, they check the policies and procedures of the
company. They ascertain whether the internal controls exist, are adequate and applied (Reuters,
n.d.).

The plan of the auditors’ audit work is based on the assessments of the risks and the
internal controls. Any wrong or inaccurate assessments of the risks and the internal controls can
adversely affect the entire audit (Reuters, n.d.).

Audit clients are usually guilty of having deficient internal controls and never correcting
them. Auditors tell their clients the problems in their internal controls, but they still continue the
audit work as usual. When the auditors perform the next year’s audit, they find that none of the
problems they detected in their clients’ internal controls were corrected (Reuters, n.d.).

2. Predictability of Audit Tests

From year to year, auditors are blatant for conducting the same audit tests, focusing on
the same amounts or types of transactions, and employing the same dollar thresholds that the
audit clients are familiar with. When audit clients know the risks and the amounts that auditors
will be focusing on, conducting audit tests will be ineffective and useless (Reuters, n.d.).

Employing the element of surprise technique is effective in preventing and detecting

fraud, but auditors rarely use this technique. Surprise helps prevent fraud because employees are
not certain as to what accounts or transactions will be selected for audit testing. They will be less
willing to commit fraud because they are unsure as to whether the auditors are on the lookout
(Reuters, n.d.).

If the audit clients know where the auditors will be focusing their attention to, it will be
easy for them to falsify documents or records, to record inappropriate or unauthorized journal
entries, or to manipulate or alter accounting records. It will be easy for a company to transfer
inventory from one place to another if it knows in advance which facility the auditors will be
visiting and inspecting. If management knows the types of inventory the auditors will count or
check, it will be easy for them to manipulate the inventory (Reuters, n.d.).

3. Insufficiency of Sampling

The auditors select a sample from the total population of transactions and test the sample
of transactions to ensure that they were correctly inputted into the accounting system. The
inherent limitation in the use of sampling is that not all transactions are tested. It impossible for
auditors to test and examine the transactions that audit clients enter into in a year (Reuters, n.d.).

There will always be a possibility that a key transaction will not be selected for the
auditor’s sample and consequently will not be examined. Because of the many transactions that
are not tested by auditors, there is a high probability that fraud will not be detected during
conducting audit tests (Reuters, n.d.).

4. Scope and Materiality

Management knows that auditors usually choose transactions with larger amounts to test.
By testing transactions with larger amounts, auditors get a greater scope and can test a larger
percentage of the dollars. This provides an opportunity for someone in the company to commit
fraud. If he or she intends to manipulate accounting records or documents, entries with smaller
amounts will most likely never be tested by auditors (Reuters, n.d.).

Auditors generally look at numbers in terms of their scope and materiality. Smaller
amounts do not really matter that much when it comes to the bigger financial picture of the
company. Auditors usually ignore or neglect that the issue of materiality is not limited to the
magnitude of dollars. Even though a small amount is immaterial to the company as a whole, the
facts or circumstances surrounding it make it material to the company (Reuters, n.d.).

5. Inexperienced Auditors
 The current business model of audit firms is that amateur auditors do much of the audit
work. Even though it may lessen the costs of performing audit services, it is not a good practice
for audit firms as they will be providing poor-quality audit services (Reuters, n.d.).

Inexperienced auditors usually do not know what questions to ask, are hesitant to ask
hard questions, or afraid to question management’s assertions. Because they are still
inexperienced, they are easily controlled, manipulated and deceived. They are often not
knowledgeable about business and financial statements because it takes time to learn these things
in the real, corporate world (Reuters, n.d.).
Most auditors do not have a thorough knowledge of fraud schemes and how they are
executed. If they are asked to explain common schemes of fraud, they cannot say anything. They
are not very skilled or proficient at identifying suspicious transactions and fraudulent
documentations (Reuters, n.d.).

6. Dynamic Business Environment

Businesses are constantly changing and progressing year after year. Mergers,
acquisitions, creation of new products and developments, and continuous strategic planning are
evidences of a dynamic business environment. It is nearly impossible to compare annual reports
of companies from year to year because of the fast-changing business environment (Reuters,
n.d.).

Through the years, auditing has not changed that much. Businesses are more difficult to
audit and fraud risks are changing, but the audit process was not able to cope up. The audit
process used the 20 years ago is not appropriate audit process to use today, but many aspects of
audit remain the same (Reuters, n.d.).

Fraudsters know that auditors cannot cope up with the changes in the business and they
can easily use this for their own advantage. Because of the auditors’ lack of knowledge, they can
easily be deceived (Reuters, n.d.).
 7. Insufficient Follow-Up

One of the most common instances of insufficient follow-up happens when the audit
client is not able to provide documentation to corroborate a transaction. Auditors are usually
quick to choose alternative transactions for audit testing when supporting documentation cannot
be obtained, but this creates an opportunity for the commission of fraud (Reuters, n.d.).

Company executives and managers are usually very skilled or expert in using social
engineering to manipulate or control auditors. They can make themselves look cooperative and
agreeable to the adjustments recommended by auditors (Reuters, n.d.).

8. Needle in a Haystack

When it comes to fraud, management has a greater advantage than that of auditors.
Management knows exactly where the fraud is hidden, but auditors do not. Auditors do not have
an idea if fraud has occured, what type of fraud has been carried out, or where the fraud is hidden
in the financial statements (Reuters, n.d.).

9. Use of Estimates

The extremely important parts of a company’s financial statements are based on the
judgment of management, which needs the use of its knowledge of the business to make
estimates. However, management estimates and judgments are hard to audit. Management may
be knowledgeable of the changes in the business that make the historical methods of estimating
certain items invalid, but auditors may not be knowledgeable about it (Reuters, n.d.).

Financial statement users need to understand the inherent limitations present in the
auditing process and that the main job of auditors is not to detect fraud. The key to conducting
more effective audits by auditors is to have an in-depth understanding of the business they are
auditing. Amateur and inexperienced auditors need more proper training and supervision
(Reuters, n.d.).
 Auditors should use the element of surprise technique. Auditors should not use the same
audit procedures, approaches and scope from year to year and surprise audit tests and procedures
should be conducted throughout the year (Reuters, n.d.).

Those who are most knowledgeable about business and financial statements need to be
more involved in the field to help inexperienced auditors learn more. The support of more
experienced auditors is needed by inexperienced auditors, so that they will not be reluctant to ask
difficult questions or question suspicious methods, transactions or management assertions
(Reuters, n.d.)

Fraudulent Financial Reporting

There are two types of intentional misstatements: fraudulent financial reporting and
misappropriation of assets. Fraudulent financial reporting is the deliberate omission of amounts
or disclosures in financial statements intended to deceive investors (Fraudulent Financial
Reporting, n.d.). When the management provides incorrect or inaccurate financial information, it
is called financial statement fraud (Rajan, 2013). This may be accomplished by:
1. Manipulating, falsifying (including forgery), or altering of accounting records or
supporting documentation from which the financial statements are prepared,
2. Misrepresenting, or intentionally omitting from, the financial statements of events,
transactions or other significant information
3. Intentionally misapplying accounting principles relating to amounts, classifications,
manner of presentation, or disclosure
4. Deliberate omissions or disclosures or presenting insufficient disclosures regarding
accounting standards, principles, practices, and relevant financial information
5. Applying aggressive accounting techniques through unlawful management of earnings
6. Manipulating accounting practices under the existing rules-based accounting standards
which have become too comprehensive and too easy to bypass or evade and contain
 loopholes that permit companies to hide the economic substance or reality of their
performance (Rajan, 2013).

The three C’s of fraudulent financial reporting are choices, corporate structure and
choice. Conditions are the motivations or pressures to commit financial statement fraud.
Conditions include pressures on companies to meet analysts’ forecasts of earnings. Company
executives commit fraudulent acts to deceive financial statement users of the true financial
performance or condition of the company (The 3Cs of Fraudulent Financial Reporting, 2002).

Corporate structure is how a company is structured to achieve its objectives (What Is

Corporate Structure? - Definition, Types & Examples, n.d.). A company’s corporate structure is
can create an environment that can increase the possibility of the occurrence of fraudulent
financial reporting. The attributes of corporate structure most likely to be correlated with
fraudulent financial reporting are aggressiveness, arrogance, cohesiveness, loyalty, blind trust,
control ineffectiveness, and gamesmanship (The 3Cs of Fraudulent Financial Reporting, 2002).

Choice is the decision made by management to engage in fraudulent financial reporting

(Rezaee, 2003). Management is most likely to commit fraudulent financial reporting when:
1. Management’s salary is closely associated with the company’s performance
2. Management is ready to take risks for corporate benefits
3. There are windows of opportunities to commit fraudulent financial reporting
4. There are great pressures inside and outside the company to maximize shareholders’
wealth
5. The chances of detecting fraud is very low

Methods for Creating Fraudulent Financial Reports

The methods for creating fraudulent financial reports are: overstatement of assets,
understatement of liabilities, overstatement of revenue, understatement of expenses, one time
expense mischaracterization, misrepresentation of information, improper use of reserve accounts,
and misapplication of accounting rules (Rajan, 2013).
 1. Overstatement of Assets

Companies manipulate asset accounts to strengthen the appearance of their statement of

financial position and to make their asset-related ratios look positive (Coenen, n.d.).

Companies are not willing to write-off the outstanding account balances that their
customers are not going to pay anymore, though the accounting rules require the write-off of
accounts receivables that management deems uncollectible. Failure to make these write-offs is
considered as financial statement fraud. This is usually done by companies because it is easy to
without getting caught. Auditors are less likely to find out manipulations in accounts receivables
because there is a high level of activity in the area of accounts receivables. And if manipulations
of these accounts are discovered, management can simply cover it up and say that they were not
aware that an account should be written off when uncollectible or that an account was long
overdue (Coenen, n.d.).

Other ways of overstating assets are not recording depreciation and impairment on assets
and failing to write down obsolete inventory items or inventory items of no value (Coenen, n.d.).

2. Understatement of Liabilities

A company understates its liabilities to make it look healthier and less risky. The lesser
liabilities a company has, the more it will look like that more of the company is owned rather
than owed (Putra, 2010).

Liabilities can be understated by omitting some of them completely from the statement of
financial position or recording them at an amount lower than what is correct. A company may
also omit deferred revenues and treating them as earned revenue (Putra, 2010).
 Understatement of liabilities can also be done by incorrectly recording liabilities and
moving them between short-term and long-term classifications (Fraud, Reasoning and
Consequences Found in Financial Statements, n.d.).

3. Overstatement of Revenue

The most common financial statement fraud is overstatement of sales or revenue figures
(Coenen, n.d.). Companies overstate their sales or revenues to enhance their income statements
and make them look healthier.

Revenue can be understated by recording fictitious revenues, recognizing revenue

prematurely, and understating sales returns (Putra, 2010).

Fictitious revenues can be created by recording sales to fake or phantom customers or by

recording inflated sales to actual customers to reflect higher amounts or quantities than actually
sold. If management artificially inflates sales to actual customers, they must be sure not to
overcharge them (Putra, 2010).

Recording revenue prematurely is recording revenue before GAAP actually allows it to

be recorded. Premature revenue recognition can be done by:

 Recognizing revenue for goods that have been ordered but have not yet been shipped at
the time of recognition.
 Recognizing revenue for goods that have been shipped but have not yet been ordered
prematurely because of an expected order (Putra, 2010).

Other ways of committing premature revenue recognition are:

 Keeping the books open beyond the end of the reporting period to record large or
unusual transactions before or after the end of the reporting period.
  Shipping goods before a sale is perfected or indications that customers are obliged to pay
for shipments.
 Recording sales for goods that will be delivered until a later date or other indications that
sales are recorded in advance of shipment.
 Recording conditional sales depending on the availability of financing, resale to third
parties, final acceptance, performance guarantees, and further customer modifications.
 Overstating percentage-of-completion revenues when there are uncertainties about the
authenticity of the contract.
 Incorrectly recording sales returns and allowances (Association of Certified Fraud
Examiners, 2012).

Understating sales returns and allowances is another way of overstating revenues. Sales
returns and allowances are subtracted from gross sales to get the net sales revenue. If sales
returns and allowances are understated, net sales revenue and net income will become overstated
(Putra, 2010).

4. Understatement of Expenses

To increase a company’s profits and strengthen the appearance of its income statement, it
may understate its expenses (Coenen, n.d.).

Expenses can be understated by postponing expense recognition and capitalizing

expenses (Putra, 2010).

The matching principle requires that expenses should be matched with related revenues in
the same accounting period. Revenues are matched with the costs of producing or generating
those revenues. Recording expenses in a subsequent accounting period violates this principles. If
the expenses are recorded in the financial period subsequent to the period wherein the related
revenues were generated, then the net income will be overstated (Putra, 2010).
 Capitalizing expenses is improperly recording a cost as an asset rather than as an
expense. Assets that are expected to provide future benefits over a number of accounting periods,
such as the purchase of a company vehicle or manufacturing equipment, should not be expensed
immediately in the period when it was purchased. Capitalizing expenses violates the matching
principle because those costs that are expected to help the company generate revenues over
future periods are recorded as assets and are gradually expensed as they are used over time. This
expense is called depreciation expense, which is the allocation of the asset’ cost over its useful
life (Putra, 2010).

5. One-Time Expense Mischaracterization

The company management may omit one-time expenses from the accounting records,
which provides investors and other people a false impression regarding the results from business
operations to capital markets participants (Rajan, 2013).

One-time expense mischaracterization is classifying ordinary, frequently occurring

expenses as one-time or non-recurring. They are removed from the financial statements and are
placed in an entirely separate category. By omitting these expenses, investors and other financial
statement users are given a false impression about the true results from the business operations of
the company (Coenen, 2008).

6. Misrepresentation of Information

Financial statements of publicly-listed companies are filed with the Securities and
Exchange Commission with many notes and explanation attached to them. These notes and
explanations are required to be made to make it easier for users to understand the business and
financials of the company. Notes and disclosures about items which are material to the financial
statements are required to be included by companies (Toenen, 2008).
\
One way of deceiving users of financial statements is deliberately removing information
from these notes and explanations and intentionally misrepresenting information (Toenen, 2008).
Management and other individuals in the company can intentionally omit or misrepresent
financial information to provide a better and healthier appearance of the financial statements to
its users (Rajan, 2013).

7. Improper Use of Reserve Accounts

Reserve accounts are accounts that hold reserves for things such as accounts receivables,
obsolete inventory accounts, sales returns and allowances, and warranties. These reserve are
inherently risky because they require a substantial amount of judgment and knowledge of the
business in order to determine their proper balances as of the end of the accounting period
(Rajan, 2013).

8. Misapplication of Accounting Rules

There are some areas in which it is difficult to judge what is right or wrong and it may
take a great deal of research and debate in order to determine the correct application of
accounting rules. When fraud is being committed, these ambiguous areas are taken advantage of
(Toenen, 2008).

Many businesses use crafty accountants and managers that are familiar with all of the
FASB and GAAP rules and regulations. Because there are loopholes in every system, fraudsters
people use this as an opportunity to commit financial statement fraud. A warning signal of
intentional misapplication of accounting rules is when there is a significant enhancement of the
financial statements of the company (Toenen, 2008).

Consequences of Fraudulent Financial Reporting

Fraudulent financial reporting is a means used to beautify the results of business

operations. It has greater implications than many managers may think of. It can adversely affect
not only the company in which it was carried out, but also the economic markets. These are the
potential detrimental effects of fraudulent financial reporting:

 It impairs the quality and integrity of the financial reporting process.

 It threatens the objectivity and integrity of the accounting profession.
 It weakens the confidence of capital markets and market participants in the accuracy or
trustworthiness of the financial statements.
 It makes the capital market less efficient.
 It greatly affects a nation’s growth or prosperity.
 It may lead to losses from lawsuits.
 It destroys the career of people engaged in the fraud.
 It causes the company involved in the fraud to become bankrupt and suffer economic
losses.
 It encourages a greater level of regulatory intervention.
 It destroys the normal operation and performance of the accused companies.

Prevention of Financial Statement Fraud

Here are some ways to prevent financial statement fraud:

1. Minimize the Situational Pressures that Encourage Financial Statement Fraud

 Avoid setting unrealistic financial goals or net income targets.

 Eliminate external pressures that will push accounting personnel to commit financial
statement fraud.
 Get rid of obstacles in the business operations that hinder effective financial performance,
such as working capital restraints, excess production volume, or inventory restraints.
 Establish clear and uniform accounting policies and procedures that do not contain
exception clauses (Financial Statement Fraud, n.d.).
 2. Lessen the Opportunities to Commit Fraud

 Create and maintain accurate, complete and effective internal accounting records.
 Carefully observe and check the business transactions and interpersonal relationships of
suppliers, buyers, purchasing agents, sales representatives, and others.
 Create a physical security system to safeguard company assets, including finished goods,
cash, capital equipments, tools, and other valuable items.
 Establish a segregation of duties.
 Maintain complete and accurate employee records.
 Build strong supervisory and leadership relationships within groups or teams to ensure
compliance with accounting policies and procedures (Financial Statement Fraud, n.d.).

3. Reduce the Rationalization of Fraud

 Managers should set a good example before employees in promoting a culture of honesty
and integrity in the area of accounting.
 Honest and dishonest behavior should be clearly defined in the policies of the company.
 The consequences of violating the policies and the punishment for violators should be
clear (Financial Statement Fraud, n.d.).

Reaction

When I read this news about China MediaExpress Holdings, Inc, I was amazed at the
power of fraudulent financial reporting in deceiving many investors and other users of financial
statements and I also realized how important having knowledge of accounting is, so that users of
financial statements will not be easily misled or deceived as to the true condition or performance
of companies. Looks can really be deceiving and it is extremely important for users of financial
statements to carefully read and understand the financial reports given to them.
 Also, I was really amazed at how China MediaExpress grossly overstated its cash
balances, business operations, profits and overall financial condition as soon as it became a
publicly traded company and at how greedy its chairman and executive are. The company
cooked the books and misrepresented financial information. The discrepancies between its public
reports and actual reports were substantial which really deceived a lot of investors to continue
investing in it.

China MediaExpress’ reputation and credibility were destroyed because of its chairman
and executive who only thought of themselves and sought to enrich themselves. Cooking the
books to entice investors is a very unethical accounting practice. It is mainly done to inflate
revenues and meet tough targets. The company did this to make their market value look good and
to attract and deceive investors.

I recommend that China MediaExpress should have created a healthy and effective
corporate culture. A company’s culture is responsible for governing the way employees interact
with each other in their workplace, encouraging employees to perform at their best level,
promoting a healthy competition in the workplace, establish guidelines to guide employees and
to give them a sense of direction, building a good reputation in the public, and promoting healthy
relationships among employees (Importance of Organizational Culture, n.d.). Had China
MediaExpress developed a healthy corporate culture centered on ethical behavior and not on
greed, success, unethical behavior and unhealthy competition among employees, fraud would
have been eliminated and China MediaExpress would not have collapsed.

I also recommend that China MediaExpress should have established and selected
appropriate accounting policies. Accounting policies are very important in ensuring
accountability and consistency in everyday transactions and financial reporting, authorization of
transactions, and safeguarding of assets and records in a company (Documented accounting
policies and procedures: more important than ever, 2015). Had China MediaExpress carefully
established and selected appropriate accounting policies, it would not have faced grave legal and
financial problems. The company should have been more transparent and efficient in preparing
and presenting its financial statements.
 I learned that greed is very bad for business. Business is not all about greed, money,
power and success. The purpose of establishing a business is not for self-interests and private
greed but for public good. The way to be successful in business is not to be greedy, to enrich
oneself and to be abusive of power and position, but to provide the needs of consumers and to
protect the interests of stakeholders. In showing concern to the needs and interests of consumers,
your business will gain a good reputation and the good image of your business will eventually
translate to profits for your business. Good reputation will naturally bring in profits.

I also learned that having a knowledge of accounting is very important. Having a strong
knowledge of accounting will help you understand how a company works, how it generates
profits, where its profits go, and the outflow and inflow of its cash. If you want to avoid being
deceived by inaccurate and misleading financial information, you must diligently study
accounting. Ignorance of accounting standards, policies and procedures will not excuse you.
Never judge a book by its cover. Always carefully read and understand the financial reports
given to you.
References

Association of Certified Fraud Examiners. (n.d.). The fraud triangle. Retrieved from
http://www.acfe.com/fraud-triangle.aspx

Brumell Group. (2015). The fraud triangle theory. Retrieved from

http://www.brumellgroup.com/news/the-fraud-triangle-theory/

Coenen, T. (2008). Essentials of corporate fraud. Retrieved from

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